Monday, October 14, 2013

The Republican threat to crash the world financial system (finally) begins to send ripples of panic through the leading circles of world capitalism

To many people in the US financial and business elites, as well as major figures and organizations in international finance, it probably seemed inconceivable that the US would voluntarily throw away the enormous advantages it derives from the fact that the US government has never defaulted on its debts. The "full faith and credit" of the US government is considered rock-solid, and US Treasury bonds are almost universally considered the safest investments in the world. For these reasons among others, the US government can borrow money at ridiculously low interest rates—practically for free—and the benefits of this exceptional credit-worthiness, plus the central role of the US dollar in the world economy, cascade through the rest of the US economy. A country might be willing to relinquish these enormous advantages, which took centuries to build up, for reasons of supreme emergency—in connection with an existentially threatening war or a revolution, for example. But would one of the two major US political parties (and the one which is usually most solicitous of business interests, though there's stiff competition there) be willing to do it carelessly and recklessly, in the absence of a genuine emergency, merely in pursuit of partisan advantage? No, the financial and business elites in the US and abroad seem to have felt that it would never actually happen, and that some solution would be worked out at the last moment.

Clearly, they underestimated the degree of radicalization and hyper-partisan fanaticism in the current Republican Party—and, in particular, the degree to which the Congressional Republicans are in thrall to their most extremist far-right elements.

Well, now that the last moment before imminent disaster is upon us, they seem to be starting to realize just how dysfunctional the US political system has actually become, and they are beginning to show some signs of panic. Contrary to some of the debt-ceiling denialism that was starting to be fashionable in some right-wing circles here, they have started to issue public warnings that a US default really would be a Big Deal, with unpredictable but almost certainly disastrous consequences. (Of course, they can't really come out and say explicitly that the Republicans are the problem, and some of them may not even be quite willing to face that reality themselves, but they're clearly hoping that the Republicans will pay attention to what they're saying.) Too little, too late? Quite possibly ... but we'll see.

Leaders at World Bank and International Monetary Fund meetings on Sunday pleaded, warned and cajoled: the United States must raise its debt ceiling and reopen its government or risk “massive disruption the world over,” as Christine Lagarde, the fund’s managing director, put it.

The fiscal problems of the United States overshadowed the official agendas for the meetings, with representatives from dozens of countries — including two of Washington’s most important economic partners, Saudi Arabia and China — publicly expressing worries about what was happening on Capitol Hill and in the White House.

The leaders came to Washington to talk about the international recovery, Ms. Lagarde said in an interview on the NBC News program “Meet the Press.” “Then they found out that the debt ceiling was the issue,” she added. “They found out that the government had shut down and that there was no remedy in sight.”

“So it really completely transformed the meeting in the last few days,” Ms. Lagarde said.

With only three days left before a potential default, Senate leaders failed on Sunday to reach agreement on a plan to reopen the government and raise the debt limit.

Many leaders at the World Bank and I.M.F. meetings said they believed the impasse would be resolved before Thursday, when the government would be at severe risk of not having enough money to pay all its bills on any given day going forward.

Of course, that's what they would like to believe; and this is probably what they feel they should say in public, even if they're secretly worried that it's wishful thinking.

But they pressed Treasury Secretary Jacob J. Lew and the Federal Reserve chairman, Ben S. Bernanke — who were both at the I.M.F. meeting — on the issue, predicting that even a near-default would lead to higher borrowing costs and a slowdown of the global economy.

The problem, of course, is that people like Lew and Bernanke know this already. They're not the ones who need to be convinced.

“This cannot happen, and this shall not happen,” Baudouin Prot, chairman of the French bank BNP Paribas, said at a meeting of the Institute of International Finance also being held in Washington. “The consequences of this would be absolutely disastrous.”

Mr. Lew acknowledged the threat. “Our work begins at home,” he said. “We recognize that the United States is the anchor of the international financial system. With the deepest and most liquid financial markets, when risk rises, the flight to safety and to quality brings investors to U.S. markets. But the United States cannot take this hard-earned reputation for granted.”

Participants at the meetings remained on edge, given the gravity of the threat. Ms. Lagarde said “that lack of certainty, that lack of trust in the U.S. signature” would disrupt the world economy.

Wolfgang Schäuble, the German finance minister, issued his own urgent appeal. “The fiscal standoff has to be resolved without delay,” he said in a statement released by the I.M.F.

Plutocratic circles here in the US also seem to be waking up to the danger, though at this point it's a little late.

Jamie Dimon, the chief executive of JPMorgan Chase, painted a bleak picture of the days ahead if there is no resolution.

“As you get closer to it, the panic will set in and something will happen,” Mr. Dimon said at the international institute event. “I don’t personally know when that problem starts.” [....]

Many of the high-ranking officials present in Washington for the meetings made open appeals to Congress, with warnings coming from many of Washington’s allies and creditors.

That formulation about "appeals to Congress" is understandable, but once again, it is important not to forget that "Congress" in general is not the problem here. The Congressional Republicans are the problem. And since it would be tactless for world financial leaders to say this bluntly, the rest of us need to do so.

Ms. Lagarde’s counterpart at the World Bank, the American physician Jim Yong Kim, said the world was “days away from a very dangerous moment.”

“The closer we get to the deadline the greater the impact will be for the developing world,” he said. [....]

Concern over the impasse has already led to a slide in stocks — including the worst two-day dip in months. American economic confidence has taken the worst hit since the collapse of Lehman Brothers in 2008. And investors have dumped certain short-term Treasury debt because of fears that the Treasury might not pay them back on time.

Markets ended last week with a burst of optimism, after House Republicans took the first steps toward a compromise. But that optimism faded over the weekend. On Sunday, with negotiations in the Senate stalled, the value of the dollar was sliding.

In the Asia-Pacific region early Monday, stock markets moved lower in Singapore, Taiwan and Australia. Markets in Hong Kong and Japan were shut for holidays. [....]

There has been much debate about how quickly problems will ripple through the economy before and after the deadline. [....] Much of the attention has been on the enormous outstanding pool of Treasury bonds and bills. Short-term government bills are used to grease the wheels for many financial transactions and provide a benchmark from which other assets are priced. If the value of that debt was suddenly drawn into question, markets could quickly seize up. [....]

It might seem incredible to imagine that the Republicans will really go through with their threat to force the US government into default and, potentially, crash the world financial system. But that outcome doesn't look at all implausible at this point. As I noted yesterday, a lot of the far-right zealots in the House Republican caucus, along with some Republican Senators like Ted Cruz and Rand Paul, genuinely believe that pushing this apocalyptic strategy to the bitter end would be a good thing ... and some of the more reality-based elements in the Republican Congressional leadership, who have followed these extortion tactics out of cynical political calculation and irresponsibility rather than genuine zealotry, may well find they have backed themselves into a corner they can't easily get out of. Or perhaps some deal will be worked out that simply prolongs and extends this crisis for another month or so? Stay tuned ...

About Me

Jeff Weintraub is a social & political theorist, political sociologist, and democratic socialist who has been teaching most recently at the University of Pennsylvania, Bryn Mawr College, and the New School for Social Research, He was a Visiting Scholar at the Center for European Studies at Harvard University in 2015-2016 and a Research Associate at the Graduate School of Social Work and Social Research, Bryn Mawr College.
(Also an Affiliated Professor with the University of Haifa in Israel & an opponent of academic blacklists.)